Five reasons why you can beat the City

published 9 July 2012

The City is a ruthlessly efficient investing machine. At least, that's what its employees would have you believe.

It takes money from investors at one end. It puts it to work where it will deliver the best returns. Investors take their profits out less the City's cut at the other end.

Teams of highly-qualified, ambitious people, some paid millions of pounds a year, work 60 to 80-hour weeks making these decisions.

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They use the latest technology to spot minute trading opportunities and pile into them before their rivals can blink.

They talk to the most successful chief executives, and the smartest analysts, on a daily basis.

Every possible tool to help them make the right investment decision is at their fingertips.

And guess what?

You can still beat them.

Because the City is not actually a ruthlessly efficient machine at all. It's a bunch of fragile, flawed and self-interested human beings who, despite all their apparent advantages, are in fact saddled with some massive handicaps when it comes to investing.

That gives you, the ordinary investor, five big advantages over the City. And these are enough to tilt the balance in your favour when it counts.

1. Your job isn't at stake

When you invest your money, the only thing you have to worry about is not losing it.

That's pressure enough. But imagine if your job depended on your investment performance too.

Imagine if every three months, your boss looked at how much your Isa had grown in the last quarter, then berated you if you hadn't done as well as the rest of the staff.

You might start straying from your strategy, and indulging in the odd short-term trade, just to make your figures look good. But taking big bets to try to make back earlier losses is a sure route to disaster.

Thankfully, you don't have this kind of pressure. Fund managers do. That's your first advantage.

2. You don't have to worry about selling yourself

By and large, City institutions don't make money by beating the market. They make money by sucking in as much of their clients' cash as they can, then siphoning off as much as they can get away with.

The return on a fund, for example, only really matters in so much as it can be used as a marketing tool to attract more money (more assets under management') to the fund. Hence, the pressure on fund managers to keep ahead of their rivals.

But it helps to have a sexy' story too. That's why when you see lots of funds launching in a specific sector, it's often a sign that the market is topping out.

Fund managers aren't daft they know that when a sector gets popular, it's a bad sign. But they have to go where the money is, because that's how they get paid.

You don't have to worry about any of this. All you care about is which investments will give you the best return, not which sectors are most exciting to other investors.

3. No one tells you what you can and can't invest in

Most fund managers have all manner of restrictions on what they can invest in. If they say they invest in blue chips, that's what they have to do, even if the manager would rather whip all his own money out of the market and stick it in gold.

You have no such restrictions. You can buy Japanese stocks one day, and US small-caps the next.

And you don't have to invest at all if you don't want to. So you can sit out the rough spells, rather than simply hoping that your fund will fall by less than the next guy's.

4. You're more agile

A complaint I often hear from small-cap fund managers is that they can't invest in the companies they really like, because they can't get hold of enough stock without moving the share price higher.

Unless you are investing millions of pounds, you won't have this problem. So you can profit from the opportunities that they are too unwieldy to take advantage of.

5. No one cares about your money more than you do

Finally, when you give your money to a fund manager, you are just one client among many. And you're unlikely to be the most important one. £100,000 is a lot of money if it's your nest egg. But it's just a tiny chunk of a £1bn fund.

So who's going to look after that £100,000 best? A guy who sees it as a fraction of a daily fluctuation in his assets under management? Or you, the one who knows just how much blood, sweat and tears went into generating that raw capital?

Pretty obvious when you put it like that, isn't it?

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.